Non-competition
agreements between employees and employers that bar the employee from
performing services for the employer’s clients are invalid even if narrowly
drawn, this district’s Court of Appeal ruled yesterday.

Partially reversing a
judgment by Los Angeles Superior Court Judge Andria K. Richey, Div. Three
unanimously reinstated the claim of a former Arthur Andersen LLP employee who
lost his job in connection with his noncompetition agreement with the firm.

Writing for the court,
Justice Richard D. Aldrich said in the published portion of the opinion that
unless a noncompetition contract falls within statutory or “trade secret”
exceptions to the Business and Professions Code’s prohibition on such
agreements, it is invalid “even if the restraints imposed are narrow and leave
a substantial portion of the market open to the employee.”

Raymond Edwards II, a
certified public accountant, sued Andersen in 2003 following his termination
for refusing to sign a broad release of liability the firm demanded in exchange
for his release from a previously executed noncompetition agreement.

Edwards joined the
former big five accounting firm’s Los Angeles office as a tax manager in 1997,
and provided income, gift, and estate planning services to its high net worth clients.
His employment with Andersen had been contingent on his signing a noncompetition
agreement, required of all the firm’s managers, which prohibited him from
working for certain categories of Andersen clients for either 12 or 18 months
after leaving the firm.

In 2002, Andersen sold
its Los Angeles tax practice to HSBC amidst the Securities and Exchange
Commission’s investigation of Enron Corporation. As a condition of the HSBC
transaction closing, Andersen required Edwards to execute a “Termination of
Non-Compete Agreement” that released Andersen from “any and all” claims
relating to Edwards’ employment with the firm, and required him to preserve
confidential information indefinitely.

In exchange for signing
the TONC agreement, Andersen would agree to Edwards’ resignation from Andersen
and employment by HSBC, and release Edwards from the 1997 noncompetition
agreement.

‘Wrongful Act’

When Andersen fired
Edwards after he refused to sign the TONC agreement, Edwards filed a lawsuit
against his former employer that included a claim for intentional interference
with prospective economic advantage. He contended that Andersen committed a
“wrongful act” for purposes of an intentional interference claim, both by
demanding that he sign the TONC as consideration for release from the noncompetition
agreement, and requiring him to sign the noncompetition agreement in the first
place.

To establish his
intentional interference claim, Edwards had the burden of proving along with
four other elements, that Andersen committed “an intentional act by the
defendant, designed to disrupt the relationship” between Edwards and HSBC.

Richey granted
Andersen’s pre-trial motion to sever the issue of the noncompetition and TONC
agreements’ enforceability as a matter of law, and ultimately concluded they
were valid.

“[T]here were more than
enough of these wealthy folks…in L.A. for all CPA’s to do the kind of work
[Edwards] was doing. So there wasn’t any significant restriction on his ability
to work. There wasn’t even perhaps any minimal restriction on his ability to
work.”

‘Narrow Restraint’

The appellate court
concluded that the “narrow restraint” doctrine was an incorrect gloss on the
prohibition against employee noncompetition agreements, found in Business and
Professions Code Sec. 16600.

“If the Legislature had
intended section 16600 to apply only to restraints which were unreasonable or
overbroad, it could certain have included language to that effect,” Aldrich
said, noting the existence of several express statutory exceptions to the bar.

Edwards’ agreement with
Andersen, the justice explained, did not fall within those express exceptions
or within the long-recognized exception for trade secrets, and therefore was
invalid even though it was limited in time and scope.

Moreover, Aldrich wrote:

“Using the invalid noncompetition
agreement to coerce Edwards into forfeiting rights was no less wrongful than
terminating an employee who refuses to sign such an agreement. To hold
otherwise would be to elevate form over substance and ignore the practical
realities of the situation.”

Counsel for both sides
told the MetNews they could not comment on the decision at this time.

Edwards’ attorney,
Richard A. Love, remarked only generally that he was “gratified that the court
clarified the law.”